WorldSys: Austrian Economics Home Study Course, Week 1

The World Systems Project is going to begin with a thorough examination of Austrian economics, starting with Robert P. Murphy’s outstanding “Austrian Economics Home Study Course“. The plan is to blog my answers to the weekly questions, with posts and book reviews tossed in as I go along.

It should go without saying that the following contains ‘spoilers’, and if you intend on doing the home study course on your own you might not want to read further.

1 Why is the school called “Austrian”?

Austrian economics takes its name from the fact that it was developed in Austria in the latter part of the 19th century by Austrian thinkers.

2 Who was the founder of the Austrian school?

The founding of Austrian economics is usually traced to the publication of Carl Menger’s Principles of Economics in 1871, which kicked off what is now known as the marginal revolution and developed ‘subjective value theory’ as an answer to various quandaries presented by classical and marxist economists. It’s important to note that, while Menger is considered the father of Austrianism, he is no longer given sole credit for subjective value theory; both William Stanley Jevons and Leon Walras published similar ideas at around the same time.

3 According to [Thomas C. Taylor’s book Introduction to Austrian Economics], what was the primary contribution of Wieser?

One of Menger’s greatest students, Friedrich Von Wieser, expanded Menger’s ideas by developing the crucial notion of ‘opportunity costs’. That is: a key factor driving the cost of a product is the bids made by various actors wanting to utilize scarce resources in their own productive processes. So part of why golf clubs cost $x is because more than one person wants to use the steel/rubber/leather that goes into making a golf club for other purposes, and makes bids for those items.

4 According to [Thomas C. Taylor’s book Introduction to Austrian Economics], what was the primary contribution of Böhm-Bawerk?

Eugen Von Böhm-Bawerk was another of Carl Menger’s famous students. His contributions to Austrianism were in his realization of the importance of the time element in decision making and resource allocation. All things being equal people value present goods more than future goods; when a capitalist accrues profits from the difference between what a good costs to make and what it can be sold for, therefore, they are being rewarded for their willingness to forgo consumption now to invest in a production process that yields more goods at some later point. On this analysis, the Marxist view that capitalists are inherently exploitative is simply mistaken.

5 What was the methodenstreit?

The methodenstreit was the controversy over the appropriate methodology for economic analysis which erupted in the late 19th century and, in many ways, is ongoing. As will be explained shortly, Austrianism is set on foundations radically different from those of the Keynesian and neoclassical mainstream.

6 Describe the popularity of the Austrian school in different time periods.

The Austrians enjoyed a good deal of popularity in the period between 1871 and approximately 1940. All of its major luminaries, especially Friedrich von Hayek and Ludwig Von Mises, were widely respected and taken seriously. A conflux of forces changed that, and the Vienna-born school of thought tumbled to a nadir in popularity during the 40’s, 50’s, and 60’s. During this time Mises alone continued to present Austrianism as a coherent and compelling body of ideas (though Hayek was producing important work throughout this period, he was at the London School of Economics and then the university of Chicago, and it’s conceivable that if Mises had not survived the rise of Nazism in Europe Hayek would today be remembered as simply an unusual Chicago economist. If that had been the case, Austrianism might have been lost).

As it happened Mises wound up at the University of New York, where he influenced such economists as Murray Rothbard and Israel Kirzner. An institute was founded with his name and in his honor in 1982. This, together with the voluminous output of various Austrian-influenced thinkers and the awarding of a Nobel prize in economics to Hayek in 1974 have contributed to a renaissance in Austrianism. There are now Austrians in a number of major academic institutions, the Mises institute has made astonishing strides in educating lay people on the importance of free-market ideas, and Austrians are expanding the main body of theory to faraway places like derivatives markets.

7 How does the Austrian school differ from the neoclassical mainstream?

From the foundations on up. Austrianism was once in the mainstream, but a desire to copy the methods of the ‘hard sciences’ like physics led neoclassical economists to begin focusing on things like the mathematical properties of economic equilibria. This caused their focus to narrow substantially, leaving out parts of the market process Austrians consider essential to a proper understanding of economic activity.

8 How does Austrian macroeconomics differ from orthodox Keynesianism?

In almost every conceivable way. One would never hear an Austrian seriously talking about ‘boosting aggregate demand’, as if what people want doesn’t matter as much as that they want. Austrians consider as seriously mistaken the Keynesian technique of utilizing gigantic aggregates like ‘demand’ and ‘production’ in models so high-falutin’ and mathematical as to be nearly metaphysical. Indeed, the core Austrian notion that the boom and bust cycle is driven by malinvestment in underproductive sectors of the economy resulting from unrestricted credit expansion simply doesn’t make any sense in Keynesian terms.

9 Are all Austrians necessarily in favor of laissez-faire?

As far as I can tell, yes. While it’s true that Austrians are almost always libertarians and that many libertarians are Austrian, the two are not identical. Austrianism bills itself as a value-free science of economics, while Libertarianism is almost always a prescriptive philosophy that holds liberty as the ideal and individual rights as unassailable. Austrians usually don’t argue against price controls (to take one example) on moral grounds, therefore, but simply because they cannot accomplish what the bureaucrats say they can accomplish, even in principle.

10 Is Austrian economics really just a political philosophy?

No, it’s a robust economic philosophy. To be sure, it has plenty to say about the success or failure of various political schemes, but it is not limited to that.